Common Mistakes for Observation Services

Common mistakes often include claim denials for failing to meet medical necessity.

Observation services are an integral part of medical care provided in United States. One of the byproducts is that every payer, including Medicare, started denying Inpatient admissions more aggressively once Observation was established, claiming that certain admissions did not meet “medical necessity” for Inpatient level care and that the medical care should have been provided in observation. The financial losses to the hospitals due to these denials are measured in in millions of dollars annually.

While many of these denials can and should be contested, a significant number of these “admissions” could have been safe and compliant observation encounters, commonly provided in a Clinical Decision Unit (CDU). That means having a robust, well-functioning CDU is vital to the financial health of hospitals.

This author was part of the team that created CDUs in two hospitals, and managed and supervised the activity of these CDUs, so my tales are truly from the trenches, as I was able to “observe” (no pun intended) the common mistakes that are made in the process of creating a CDU and standardizing the CDU’s daily operations. It should be noted at the outset that not all hospitals make all or some of these mistakes, but for the ones that do make mistakes, it is very important to correct them as soon as possible.

Observation had its growing pains, for many reasons, particularly since Medicare had a somewhat vague definition, stating, “Observation care is a well-defined set of specific, clinically appropriate services, which include ongoing short-term treatment…”1 Well defined? What are those specific clinically appropriate services?  

The first important decision a hospital must make is should it be an open or closed CDU. I have seen more pitfalls from having an open unit, rather than a closed unit, primarily because private attending, who also maintain an office practice, each have an individual style of managing patients, and a successful and efficient CDU is dependent on medical protocols, liberal use of order sets, and very little room for individual variation.

Many of these private attendings are not fans of these concepts, and as a result, their patients are subject to many unnecessary tests, medical procedure, and consultations for “incidentalomas.” Does an EGD for chest pain diagnosis sound familiar?

We all know that time is of the essence when a patient is in observation, and the 24-48 hours Cinderella clock is moving fast. And since time is money, the longer the patient stays in observation, the less money the hospital makes. As a result, a successful CDU is based on providers rounding at least twice a day and making decisions based on updated results of tests and assessment of the patient’s medical status. Private attendings generally cannot return to the hospital multiple times a day due to their busy schedule.

When private attendings manage their own patients, there could be a conflict between the clinical administration and doctors. A famous example that made headlines, occurred at Northwest Community Hospital in Arlington Heights Illinois.2 The hospital’s chief medical officer noted that the observation patients were often not seen by the doctors for up to 24 hours, which resulted in “serious impact” to the institution as well as a “patient dis-satisfier.” The hospital wanted to obligate the doctors to see the patients within four hours of placement in observation. The doctors strongly objected, as they saw the rule as an attempt by the hospital to “grab patients” from the doctors.

This demonstrates how doctors often look at some observation rules, sometimes ignoring the cardinal Medicare rule of keeping the patient in observation “less that 48 hours and usually less than 24 hours.” On the other hand, using hospitalists, or combining hospitalists with medical residents or physician assistants/nurse practitioners to manage the patients in observation is an attractive option, as they are always present in the hospital and can manage the patients expeditiously. So, at the end of the day the hospital leadership has to decide if a closed unit is a good option or not. A lot depends on if doctors at a particular hospital can and are willing to learn the “rules of engagement” and abide by them.

Another potential pitfall of observation are the consultants called to assist with the care of the observation patient. Based on my experience, the three most likely consultants to see patients in observation are cardiologists, gastroenterologists and neurologists. When evaluated by these consultants, patients are much more likely to end up having a stress test, an endoscopy and a multitude of neurologic tests. A well know joke at one observation unit goes like this: What does it mean when you see the following orders: MRI, MRA, EEG and carotid Doppler? It means, the neurologist was here.

The question I always ask the consultant: Does the patient need to have the test during the hospital stay? And if yes, why? If not, can it be done safely after discharge? The documentation to justify the necessity of the test while the patient is in observation is often very weak or nonexistent.

The managing physician must question the consultant on this issue rather than just let them order at will. The managing physician is the captain of the ship and any extra unnecessary time the patient spend in observation will negatively affect their observation metrics, not the consultant’s.

There are other mistakes and pitfalls that can impact the financial success of the observation unit, but the ones enumerated above are common and in my opinion have the most financial negative impact.

Reading this, one may think that I have a general negative opinion about doctors but let me assure you that this is not case. I am a doctor. I was a private attending for over 24 years and I know from personal experience how difficult is to practice medicine, with all the rules and regulations. But physicians must learn to adapt and learn new tricks, rather than continuing practicing the “old fashioned” way which is no longer an acceptable standard of care.

Observation is here to stay, and to survive financially one must play by the rules, not oppose nor resist them.

Contact the Author:

About the Author: Tibian Abramovitz, MD is a healthcare provider primarily located in Merrick, NY, with another office in Brooklyn, New York. He has 40 years of experience. His specialties include internal medicine and pulmonary disease.


1. Excerpt from CMS online only Manual (IOM): Publication 100-2, Chapter 6, §220.5 A. Outpatient Observation Services Defined.

2.Northwest Community’s call to treat patients faster irks doctors– Crain’s Chicago Business April 10, 2015.

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